Gold loan companies-- muthoot and manappuram finance

Stock Opportunities
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GOLD LOAN COMPANIES


INDIA IS A HUGE GOLD MARKET ESTIMATED TO HOLD AROUND 10% OF WORLDâS TOTAL GOLD STOCK. LOANS AGAINST GOLD PLEDGING IS A VERY OLD BUSINESS AND IT IS ASSUMED THAT AROUND 10% OF THE TOTAL GOLD STOCK IS PLEDGED AGAINST LOANS. THIS BUSINESS IS A HUGE BUSINESS AND THE ORGANISED MARKET HAS ONLY 25% OF THE MARKET SHARE OF OVERALL GOLD LOAN MARKET, REST ACCOUNTED BY THE UNORGANISED MARKET.


ORGANISED GOLD MARKETS HAVE GROWN BY AROUND 40% CAGR IN THE LAST 8-9 YEARS. THE MAIN BENEFICIARIES OF THIS BOOM HAVE BEEN TWO PROMINENT COMPANIES NAMELY MUTHOOT FINANCE AND MANAPPURAM FINANCE. BOTH HAVE GROWN AT A TREMENDOUS PACE IN THE LAST FEW YEARS.


BOTH THESE SPECIALISED NBFC SCORE OVER BANKS IN THE GOLD LOAN BUSINESS BECAUSE OF CUSTOMER PREFERENCE FOR THESE NBFC. MAIN REASONS FOR THIS PREFERENCE ARE LOW LEVEL OF DOCUMENTATION, QUICK DISBURSAL OF LOANS, HIGHER LTV OFFERED , EASE OF ACCESS TO THESE NBFC, PERCEPTION OF HIGHER SAFETY OF ORNAMENTS , FLEXIBILITY OF LOAN TENURES ETC.


BOTH THESE COMPANIES HAVE HAD A DREAM RUN IN TERMS OF THEIR FINANCIAL PERFORMANCE BUT THEY ARE EXPECTED TO FACE SOME HEADWINDS GOING FORWARD.


FIRST, THE HIGHER BASE EFFECT IS LIKELY TO PLAY OUT AND HENCE GROWTH FIGURES SHOULD SHOW SOME MODERATION AS COMPARED TO EARLIER.

SECONDLY, THE COMPETITION IN SOUTHERN MARKET IS INCREASING.

THIRDLY, THE RBI GUIDELINES WHICH REMOVED THESE INSTITUTIONS FROM PRIORITY LENDING SEGMENT IS LIKELY TO PLAY SPOILSPORT FOR THEM.

AND FINALLY FUNDING COST OF THESE INSTITUTIONS IS LIKELY TO BE HIGHER WHICH WOULD PUT PRESSURE ON THE NIM â NET INTEREST MARGINS OF THESE COMPANIES.


THE ABOVE FEARS HAVE LED TO A BIG UNDERPERFORMANCE BY THESE COMPANIES IN TERMS OF THEIR STOCK PRICES.


MUTHOOT FINANCE


CMP 162 BOOK VALUE 62


THIS IS THE BIGGEST GOLD LOAN COMPANY IN INDIA. IT HAD RECENTLY COME OUT WITH ITS IPO AT A PRICE OF 175 AND WAS WELL SUBSCRIBED BY THE INVESTING COMMUNITY. POST ITS IPO, THE STOCK HAS BEEN UNDERPERFORMING WITH THE STOCK PRICE HITTING A LOW OF AROUND 150 AND CURRENTLY IS RULING AT AROUND 162. BASED ON CURRENT MARKET PRICE THE MARKET CAP OF MUTHOOT FINANCE IS 6086 CRORES.


FINANCIALS


YEAR

06

07

08

09

10

11

OP INCOME

145

230

366

615

1077

2298

PBT

41

70

97

148

345

761

NET PROFIT

27

44

64

98

227

494


ROE FOR MUTHOOT HAS BEEN WELL ABOVE 30% AND ROA IS WELL ABOVE 3. THERE COULD BE SLIGHT MODERATION IN THESE RATIOS GOING FORWARD DUE TO CONTRACTION IN NIM DUE TO HIGHER FUNDING COSTS.



MANAPPURAM FINANCE


THIS COMPANY HAS BEEN LISTED SINCE MANY YEARS AND HAD A STRONG RUN UP IN NOV 2010 WHEN IT POSTED A HIGH OF 95 (ADJUSTED FOR SPLIT) AND SINCE THEN HAS BEEN UNDERPERFORMING.


BOOK VALUE IS 23 AND MARKET CAP OF MANAPPURAM IS 4714 CRORES.


FINANCIALS


YEAR

06

07

08

09

10

11

OP INCOME

20

43

79

165

477

1178

PBT

6

16

32

46

182

424

NET PROFIT

4

10

21

30

120

282

ROE HAS BEEN IN EXCESS OF 20-25% AND ROA ARE ABOVE 4%.


MANAPPURAM HAS RAISED CLOSE TO 800-900 CRORES BY WAY OF QIP AT A PRICE OF 84 DURING FY 11. THIS SHOULD HELP IT SUSTAIN ITS GROWTH TO SOME EXTENT.


COMING TO INVESTMENT THESIS IN THESE COMPANIES,


1. THE BUSINESS IS EASY TO UNDERSTAND FOR THE INVESTOR

2. THE DEMAND FOR GOLD LOANS IS GOING TO REMAIN ROBUST

3. THE ORGANISED MARKET IS SLATED TO CONTINUE GROWING AT THE COST OF THE DOMESTIC MONEY LENDERS

4. EVEN WITH REDUCTION IN NIM THESE COMPANIES ARE LIKELY TO SUSTAIN GOOD GROWTH IN REVENUES AND PROFITS


5. THERE SEEMS TO BE A DISTINCT GAP BETWEEN THE PERCEIVED FEARS OF THE MARKETS AND THE ACTUAL SITUATION FOR THESE COMPANIES.


6. ANY CHANGE IN THE INTEREST RATE CYCLE WOULD BE VERY BENEFICIAL FOR THESE COMPANIES.

7. THERE IS HUGE SCALABILITY AND OPPORTUNITY IN THIS BUSINESS WHICH TILL DATE IS A VIRTUAL DUOPOLY BETWEEN THE ABOVE COMPANIES.


NEGATIVES


1. ANY GOVT POLICY INTERVENTION FIXING A CAP ON THE INTEREST CHARGEABLE BY THESE INSTITUTIONS IS LIKELY TO PLAY SPOILSPORT FOR THEM.


2. HIGHER FUNDING COSTS IS LIKELY TO AFFECT NIM AND HENCE PROFITABILITY.


3. SHARP CORRECTION IN GOLD PRICES OF THE MAGNITUDE OF MORE THAN 20-25% COULD AFFECT THESE COMPANIES.


LOOKING AT THE ABOVE SYNOPSIS IT SEEMS THAT INVESTMENT IN THESE GOLD LOAN COMPANIES IS LIKELY TO BE REWARDING FOR INVESTORS HAVING A CONTRARIAN MINDSET OF INVESTMENT.

1 Like
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Conference Call by Capital Market.

**Manappuram Finance **conducted a conference call to discuss the results on March '19, 2013 to discuss impact of fall in gold prices on the company’s financial. Mr. I. Unnikrishnan, Executive Director and Dy. CEO and Mr. Sachin Agarwal, Sr. Vice President, of the company addressed the Concall.

Highlights of the Concall

Net profit of the company had decreased 48% in Q3FY’13 to Rs 84.38 crore compared to Rs 161.37 crore for Q3FY’12 while for 9MFY’13 net profit was down by 14% at Rs. 349.86 crore as against Rs.404.50 crore reported for 9MFY’12. The company had attributed the decline in profits to the fall in yield following the realignment of the lending rates in line with lower LTV norms

The company had auctioned around 2 tonne of gold jewellery during Q3FY’13 with principal outstanding of Rs 359 crore. As some part of the loan portfolio had LTV ratio of 90% at the time of origination the proceeds from auction of jewellery was not able to cover the principal and accrued interest resulting into under recovery. Total under recovery during the auction was Rs 39.12 crore. These loans primarily originated before August 2011. The company had expected further under recovery of Rs 35 crore in Q4FY’13 at the time of last conference call.

However with 5% fall in gold prices in last two months the company expects under recovery of around Rs 250 crore in Q4FY’13 on principal outstanding of Rs 1500 crore and interest amount of Rs 500 crore. This would result PAT into loss of about Rs 50 crore.

The company expects profit of Rs 420-430 crore in FY’14 assuming current gold prices.

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I am one of the unlucky shareholders

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Interesting reading about gold loan companies appeared in moneylife

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Myinstinctalways said its risky business. Think of this, the guy who goes for loan against their jewellary with so high interest rates goes only when he desperately needs money with no other optionsavailable, now imagine if his situation further worsens, he will tend to default, and if he learns gold prices have gone down further its increase the defaulting probability further.

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@Mahesh I dont feel so cause gold is attached withemotionalvalues of invoster so they wont let it go as eazy as you think.

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LTV of 85%+ is way too high, with a 15%+ kind of interest, in just about 1 year the accumulated loan + interest value will come close to the market price of gold (assuming no movement in gold price). As far as i know, these people don’t follow up on the interest payment till 1 year from loan disbursal and the loan has to be renewed every year (it’s the same process in Banks too). So, imagine the stress this business can get into if their is a wild swing in the gold price on down side in a year ?

Emotions are surely attached, but that can be sidelined when bigmonetarygains are in question. Like, just forget about the gold which is on loan, and instead buy new gold with that same money.

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Mahesh the business is not bad

It is manappuram’s fault they were just too aggressive with LTV to attract new business. On top of that they probably kept on hiding and extending the loans.

New RBI guidelines with regards to auction of collateral gold also did not help as the same adds 60-90 days of gold price risk on lenders.

Myinstinctalways optionsavailable,

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Everything related to Gold is being butchered but muthoot and manapurram are really hit hard. Is market over reacting ?

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Gold NBFC may test patience of investors at current level. I don’t think so current levels are bad.

Lower 60% LTV is actually beneficial for NBFC in case gold price fall in future. They can offset this loss in event of auctions. I believe 85% LTV was having highest risk and investors suffered by taking this risk.

If you can answer following Qst favorably, these NBFC are good bet for next 3 years.

  1. Will current interest rate be same or fall during next 3 years ?
  2. Will gold price fall drastically - say 25% during next 3 years ?
  3. Do management still have ability to increase sales and shareholder value like they have done in past 10 years ?

Kunal

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George Alexander Muthoot, Managing Director and Oommen K. Mammen, CFO of Muthoot Finance addressed the call:Highlights by Capital Mkt:

  • The whole of this last four quarters have been quite challenging and the current quarter is also a very challenging quarter.

  • The LTV cap fixed at 60% by the RBI and old loans going out of the system, given at higher LTVs, led to moderation in AUM.

  • last month RBI has come out with a circular, allowing to extend loans at 75% LTV of the gold price. In Q4FY2014, company is taking quite a few steps to shore up the gold loan portfolio. Post this regulatory change, the highest LTV per gram is offered at 75% or Rs 2000.

  • Company has appointed the McKinsey & Company to help in the gold loan operations and may be over a period of time company should be able to see much better productivity at the branch level, employee level.

  • Company is gradually moving away from the unlisted NCD to the listed NCD route.

  • The branch network continues to be at 4,260. Company has opened only a handful of branches in the last quarter that also in selected places with growth potentials. The number of employees continues to be at 25000.

  • The credit losses stood at Rs 12.19 crore for the whole year. The average gold-loan ticket size has come down from Rs 41000 to Rs 38566.

  • Company is maintaining a higher standard asset provisioning of 0.4% against the regulated requirement of 0.25%.

  • Company proposes to roll out the setting up of the White-Label ATM in this quarter itself.

  • Liability side, company is very comfortable and only challenge is to bringing down the cost of borrowing.

  • Company expects the loan growth of 10-15% for FY2015 on lower side. Going forward, if economic activities also improve, company should see better growth.

  • Company has plans of going into housing finance, but this can be done only in a separate company which is under consideration.

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Mannapuram Finance buys Jaypee’s housing finance company- MIlestone.

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This stock first attracted my attention when few of my relatives in town area borrowed money from a lender by keeping gold with the lender as collateral & paid huge interest too.I was surprized that till now this practice exists & that too around myself when there are so many banks nearby.Then second time I saw a new muthoot finance branch open in our own building.The shop owner was my close friend.So I could supervis the whole process how they went systematically about setting it up.I was

impressed.

After that saw the regular dividend,cheap valuation.chances of good growth in future.So invested in it.I am happy I did.

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Not much activity on this thread.

Manappuram PBV still v cheap as BV is 33.Div yld 3.5%,PE 11,Gold price increasing,all 4 verticals of gold loan,MFI,HFC N CV financing booming

Views invited

discl- Recently invested@32-37 range.bought today also

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There was insider buying at the start of the Year in Manappuram, this attracted me to look into detail. One interested thing is they have reworked their LTV operating model, which has de-coupled their gold loan portfolio from negative swings in Gold prices. Their MFI is Growing at 30% and already 8% loan book is non-gold , which mgmt plans to increase to 25% in next 2-3 years.
HNI Ashish Dhawan has doubled his stake in Sep-15 quarter.
Not sure how much stock price will grow from here but aftr 2-3 quarters of consistent results, market may start to think it deserves more than book value.
Disc: I bought around 28-30, so I am biased.

1 Like
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Long time lurker, first time poster

Why dont they hedge the gold exposure. The high interest margin covers the hedging cost
Its has to be only one way hedge via options in case gold looses value they can assume the gold they have will not be reclaimed so just take a put option

I have been watching the stock for a long time - its a good business model but I dont see spectacular returns. I dont see any areas of growth on the contrary I think the business will eventually not make sense as more people realise there are better and cheaper loan options

I think market rewards growth or growth prospects. I dont see a 10% growth for the next 3-5 years hence I avoided going long on this one

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Hey Edward,

The company has increasingly started focusing on Micro finance, Housing finance, Vehicle finance. Even the gold segment is growing nicely.

The management has been diversifying.

The interesting part is that the promoter has been acquiring shares from market. Not only promoter, but every single independent director too has been buying shares in 2016.

SI.

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You need to raise loans or take customer deposits in order to give loans
How will they manage to do that
For housing finance they will have to take a risky loan or give better interest, both of which can be potentially problematic

They need also to hire a person who had handled this before, it’s a new area. Given a choice a person will work with canfin or take loan from cheaper banks unless they refuse him

Their past history in managing risks with gold loans is not very impressive

19

Hello Edward,

Your assumption on the housing finance matter is just a GUESS that a consumer will pick Canfin over Manappuram. The market is big enough to accommodate everyone in HF and even Micro Finance.

1- Manappuram is very cheap on valuations. Cheaper than almost all peers.
2- Promoter himself is buying shares from market.
3- Management has guided for 20% cagr this week.
4- Business is turning around very nicely.
5- No Dilution is on the horizon.

Also about your last point…please note that they ran into problems due to regulatory changes more than anything else. They have changed their model and the new government is very stable now on their policies.

Your views seem too cynical to me for some reason. Things arent nearly as negative as you think. Q4 will prove it.

Cheers
S.Investor

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I appreciate your comments SecretInvestor

This is a forum sharing views and not an obligation to buy to sell based on what I observed in the financials

My last observation was about the way they managed their gold risk which could have easily been averted

Regarding their bold plans to expand into housing and micro finance, every expansion comes with a risk and a company that couldn’t hedge their gold risk makes me hesitant that I might be betting on Midlands bank that wanted to expand into US

When companies like Manappuram become expensive relative to their business model its an alarming sign we might be in the upper tranches of the bull market

I would watch Mannapuram only for those reasons

May the markets be kind to you !